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Iridium Technology – Profitability Best Practices Page 1 © 2015 Iridium Technology LLC

Profitability “Best Practices” for

Legal and Professional Services Firms

Introduction

Here it is – in this document we lay out everything that we know, think, and believe about how legal and

professional services firms should analyze and report on profitability. This document is intended for Iridium

clients that are kicking off their Profit module implementations, but will also provide a lot of insight on profitability

reporting for any law firm management or financial professional. The concepts and practices that are detailed

in this document are all fully supported by the latest/upcoming Iridium BI Profit module release.

Let’s Talk About “Rigorous Analysis”

The staff at Iridium has spent years studying and implementing profitability systems for law firms. We are

confident that the latest version of our Profit module is taking law firm profitability analysis to a level that has

never been seen or even dreamed of previously. Our clients are demanding, and we are committed to

implementing their most challenging requirements.

Iridium is defined by rigorous analysis, innovation, quality, value, and service. You can see these values in

this document and in our products.

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do not distribute this document outside of your firm.

This document contains confidential and proprietary information to Iridium Technology LLC and cannot be shared,

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Due to the confidential nature of this document the content and/or the information therein specifically

should not be shared with employees of ADERANT, ELITE, LexisNexis, consulting/solution vendors in the

Legal IT space.

This document cannot be distributed outside of your firm without express written permission from Iridium

Technology.


Table of Contents

Overview ................................................................................................................................................................................................................... 4

The Purpose of Profitability Analysis ........................................................................................................................................................ 4

The #1 Best Practice: “Keep it Simple!” ................................................................................................................................................... 4

Profitability – Quick Introduction ................................................................................................................................................................... 5

The Income Statement ................................................................................................................................................................................... 5

Profit Data Sources .............................................................................................................................................................................................. 6

Data Sources ...................................................................................................................................................................................................... 6

Residual Calculations ...................................................................................................................................................................................... 6

Profit Accounts ...................................................................................................................................................................................................... 7

Profit Accounts – Introduction .................................................................................................................................................................... 7

Profit Account Types ....................................................................................................................................................................................... 8

Profit Account Categories ............................................................................................................................................................................. 8

Expense Data .......................................................................................................................................................................................................... 9

GL Expenses ........................................................................................................................................................................................................ 9

Payroll Expenses ............................................................................................................................................................................................... 9

Revenue Data ....................................................................................................................................................................................................... 10

Revenue Profit Accounts ............................................................................................................................................................................. 10

Revenue “Slices” ............................................................................................................................................................................................. 10

Revenue Data Granularity ........................................................................................................................................................................... 10

HR Data ................................................................................................................................................................................................................... 11

Defining Working Attorneys ...................................................................................................................................................................... 11

Working Attorney Assignments and FTEs ............................................................................................................................................ 12

Title Point Profiles .......................................................................................................................................................................................... 12

Profitability – Allocation Process .................................................................................................................................................................. 14

Allocation Methods ....................................................................................................................................................................................... 14

Allocation Groups .......................................................................................................................................................................................... 15

Allocation Rules .............................................................................................................................................................................................. 16

The “Wash-up” Rule ...................................................................................................................................................................................... 16

Dimensions for Analysis .............................................................................................................................................................................. 17

Iridium’s Profitability “Thesis” ........................................................................................................................................................................ 18

Profitability Scenarios........................................................................................................................................................................................ 20

Iridium BI: Six Profit Scenarios .................................................................................................................................................................. 20

Work Period Basis (Recommended) ....................................................................................................................................................... 20

Profit Collected Basis (Alternate Scenarios) ......................................................................................................................................... 22


Flexible Profitability Analysis .......................................................................................................................................................................... 24

Scenarios............................................................................................................................................................................................................ 24

Filtering Expenses .......................................................................................................................................................................................... 24

Cost Rate Types/Periods ............................................................................................................................................................................. 25

Best Practices Topics ......................................................................................................................................................................................... 26

Should your Profit Cube Reconcile to your Income Statement?................................................................................................. 26

Expense Smoothing....................................................................................................................................................................................... 27

Part-Time Working Attorneys ................................................................................................................................................................... 27

Working Attorneys with Low Hours (Rainmakers, Others) ............................................................................................................ 28

Split Assignments ........................................................................................................................................................................................... 29

Non-Working Attorney Revenue ............................................................................................................................................................. 29

Departed Working Attorneys .................................................................................................................................................................... 30

Partner Compensation/Draws ................................................................................................................................................................... 30

Profitability Information Access ............................................................................................................................................................... 31

Profitability Dashboard Access ................................................................................................................................................................. 31

Special Topics ....................................................................................................................................................................................................... 32

Bring us Your Toughest Customizations! ............................................................................................................................................. 32

Handling Exceptions ..................................................................................................................................................................................... 32

Loading Data from External Data Sources ........................................................................................................................................... 33

Ad-Hoc Analysis (Power Users) ................................................................................................................................................................ 33

Multi-Currency Support ............................................................................................................................................................................... 34

The “PLACEHOLDER” Matter ..................................................................................................................................................................... 34

Multiple Profitability Scenarios (Part 2) ................................................................................................................................................. 34

Participating Attorney Slicing .................................................................................................................................................................... 35

GL Transactions for Working Attorneys ................................................................................................................................................ 35

Handling Inter-Office Expense Transfers .............................................................................................................................................. 36

Appendix 1: Iridium BI Profit Dashboards ................................................................................................................................................. 37

The Overview Page (Part 1) ........................................................................................................................................................................ 38

The Overview Page (Part 2) ........................................................................................................................................................................ 39

List Format Pages ........................................................................................................................................................................................... 40

The Working Attorney Overview Page .................................................................................................................................................. 41


Overview Welcome to the Iridium BI Profit module! This documents will be used to drive your implementation decisions

and inform you regarding the capabilities of the Profit module. Every Profit module implementation is different,

and this document will spur discussions about the unique aspects of your firm’s Profit module implementation.

The Purpose of Profitability Analysis

Determining accurate profitability for the many components in your firm is a critical tool for improving overall firm

profitability. The most common key drivers behind a Profit module implementation are:

To understand the contribution of both business units and individuals to the firm’s overall profitability

To help individual partners see the profitability of their book of business, allowing them to adjust

leverage, rates, etc.

To help identify the least profitable areas (clients, practice areas, working attorneys, etc.), allowing the firm

to adjust course

To streamline the generation of monthly, quarterly, and annual profitability reports

To empower working attorneys to explore their profitability on a near real-time basis with role driven

dashboards

To use profitability data as an input into the partner compensation process

The #1 Best Practice: “Keep it Simple!”

After years of experience with implementing profitability solutions for leading law firms around the globe, we can

offer this “best practices” advice:

Wherever you can, keep it simple. You will have many decisions to make, and in most cases you should

go with the simplest choice. That means fewer allocation methods, fewer rules, and fewer exceptions.

We can say without a doubt that the firms which have simpler implementations are more satisfied with

the results

Every time you bring in more complexity you:

Reduce the ability to communicate the profitability calculations to the partners and firm management

Reduce the overall trust in the profitability values and calculations

Build a culture where partners will continually feel entitled to lobby for more exceptions

Increase the time required to rebuild/process the cube

Slow down the performance of ad-hoc queries and dashboards

Increase the amount of time that the finance staff will spend validating and justifying the cube values

If there must be complexity, it is best to build up your allocations in an iterative manner since it is much

easier to explain and refine than to start with complex rules


Profitability – Quick Introduction We will start with the clear statement that no two law firms are alike, and we don’t expect your firm to use an out-

of –the-box profitability solution. So while we are providing a generic overview in this section of how we think law

firm profitability should be calculated, we want to emphasize that we fully expect your firm to configure and

customize our solution to match your firm requirements.

The Income Statement

The screenshot below shows a sample Income Statement from our Profit dashboards:

If you are reading this document, then you are of course familiar with these two basic equations:

Gross Profit = Revenue – Direct Expense

Profit = Revenue – (Direct Expense + Overhead Expense)

The power of the Iridium BI Profit module is that you have full control over every piece of data and the rules

behind the equations – with no limits. Direct expenses can be assigned to a single working attorney. Typical

direct expenses are salary, bonus, taxes, benefits, etc. Your firm determines which expenses are direct, and how

you want to combine them and report on them. Overhead expenses are assigned to working attorneys by

allocation methods. Typical overhead expenses are Admin, IT, HR, Rent, etc. Your firm determines the allocation

rules – again with no limits.

Profitability is calculated at the level of Working Attorney + Matter in each period. Those values are then

aggregated by the cube to report profitability by Office, Department, Team, Matter Responsible Partner, etc.


Profit Data Sources

The Iridium BI Profit module allows firms to load in expenses, revenue, and setup data from multiple sources.

Examples of sources could be PMS GL, PMS Time & Billing, Payroll, FTE spreadsheets, etc. There are no

limitations on setting up the data sources that your firm needs.

Data Sources

These are the Data Sources that are typically defined in a client implementation:

Source Details

REV Revenue is loaded from the Iridium BI Revenue module. This assures that the Profit module

and the Revenue module will be in reconciliation.

If your firm has not purchased the Iridium BI Revenue module, we will still get the revenue

directly from your PMS.

GL-IS GL-IS indicates Income Statement data from your PMS GL

GL-BS GL-BS indicates Balance Statement data from your PMS GL

Note that many firms will not bring any balance statement data across, and for those that do

this will typically be limited to partner draws

PAYROLL Typically, compensation data will come directly from your payroll system, but in exceptional

cases a firm may be storing compensation data in its GL

The main idea here is to load these expenses as direct expense for working attorneys.

Typically all payroll systems have these expenses in this format (per working attorney)

whereas GL only has aggregated data.

Iridium provides tables that serve as a staging area for loading your payroll expenses

Other External

Expenses

Firms have the option to load additional expenses from any external system

As an example, your firm might have expenses for the Ukrainian office only available in a

spreadsheet

Residual Calculations

In many cases the payroll expenses will not tie to the GL expenses in the corresponding accounts. As an example

the payroll for January may total to $3.3 million, but the GL accounts may total $3.4 million. Your firm than has a

choice: should we load that missing $100K residual, or do you stick with the $3.3 million value in the payroll file?

And if your firm decides to load the missing $100K, how should it be allocated?

Best Practices:

We fully support either loading the residual or suppressing it. It is really your firm’s choice.

If we had to recommend a choice it would be to load the GL residual. The expenses are in the GL, so they

are probably real expenses that should be included in your profitability analysis

If you will load the residual expenses, we will create a Profit Account for “PAYROLL-RESIDUAL”, and

allocate it to working attorneys based on your chosen method.


Profit Accounts

Profit Accounts – Introduction

A Profit Account is a grouping of expenses or revenue that will make up your income statement. Typically there is

a “many to one” mapping between your GL accounts and Profit account. Each firm has a design decision: how

many GL accounts should I combine into each Profit Account? Note that the Profit Accounts are a key concept in

your profitability analysis, and this is one of the decisions that has the biggest impact on the complexity of your

profitability implementation. The two options are:

(1) Aggressive Rollup (recommended): Aggressively roll up GL accounts into Profit Accounts. An example

of this strategy would be if a firm has 300 GL accounts and rolls them up into 15 or less Profit Accounts.

The advantages of this strategy include small cube size, better performance, faster processing, and easier

reconciliation.

(2) Less Aggressive Rollup: Choosing the middle path, for example rolling up 300 GL accounts into 60 Profit

Accounts.

Let’s look at an example of two GL accounts to determine how we should design the Profit Accounts:

The question is “for these two GL accounts what are the reporting and analysis requirements?” There are several

basic options:

Report on them as individual line items (rows)

Combine them into a single line item (row) for “Professional Insurance”

Roll them up into a more generic line item (row) for “Insurance” and add 5 other GL Insurance accounts

Roll them up into an even more generic line item for “Firm Business Expense”, combining them with 20+

other GL accounts.

So how do we determine which solution is best? There are two basic questions:

Will both expenses use the same allocation method? If not, then they need to be in separate Profit

Accounts. (Alternatively we can define a Profit Account variant and leave it defined as a single Profit

Account)

Will the firm want to see these expenses broken out as separate line items when reporting on

profitability? If “No” and they have the same allocation method, then we will want to combine them.

Best Practices:

Choose “Aggressive Rollup”, and keep the number of Profit Accounts to around 15. If you can go even

lower that is better.

Keep your Profit Accounts close to the Profit Accounts implemented by Iridium in your Best Practices

implementation. This will enable you to compare your profit expenses against those of other firms if you

choose to purchase our Benchmarking module.


Profit Account Types

Each Profit Account is assigned to a Profit Category Type. This is a high-level grouping of Profit Accounts that

defines the first tier of the Profit Account hierarchy. The list of the types is defined by Iridium and cannot be

changed. But you still have the choice to assign every Profit Account to one of the Profit Account Types.

Profit Account Types (fixed):

Profit Account

Type

Description

Revenue Revenue that is assigned to working attorneys (typically assigned directly and not allocated)

Direct Expense Expenses that are passed directly through to the associated working attorneys

Overhead Expense Expenses that are processed by the profitability engine and are allocated to working attorneys

based on the rules and methods defined by the firm

Gross Profit This is a system-defined Profit Account and cannot be removed or modified by clients

Profit This is a system-defined Profit Account and cannot be removed or modified by clients

Profit Account Categories

Each Profit Account is also assigned to a Profit Category. This is a second-level grouping of Profit Accounts that

defines a more granular rollup of the Profit Account hierarchy. These are not predefined like the Profit Account

Types and you can choose any value and categorize Profit Accounts as you like. The default Iridium

implementation is to have the Profit Categories set in a one-to-one mapping with the Profit Account Types.

Default Profit Account Categories (can be modified by client):

Item Description

Revenue Revenue that is assigned to working attorneys (typically assigned directly and not

allocated)

Direct Expense Expenses that are passed directly through to the associated working attorneys

Overhead Expense Expenses that are processed by the profitability engine and are allocated to working

attorneys based on the rules and methods defined by the firm

Best Practices:

If you want to do an analysis with a rollup of Profit Accounts that is different from the pre-defined Profit

Account Types, this is your chance to do it. For example, your firm might have four Profit Accounts

associated with Occupancy, and you could then define a Profit Account Category for Occupancy to roll

them up for reporting and analysis.


Expense Data

Once you have defined your Profit Accounts, the next step is to create the mapping between the GL Accounts and

the P–Accounts, and then load the expense data.

GL Expenses

This is a pretty straight-forward operation: For each GL expense account, the first question is if you want to bring

the expense from the GL into the Profit module. There are three reasons to exclude the GL Account from the

mapping:

The account is inactive, and there are no expenses in the years for which the profit module will be

populated

The account expenses will be loaded from another source, such as payroll expenses. In this case please

note you should still map this account since the residual amount should be calculated, loaded and

potentially allocated.

The account is not appropriate for loading into profitability – for example it is an account that your firm is

manually suppressing in the firm Income Statement

Payroll Expenses

Each firm will need to determine the granularity of the payroll expenses that they will bring into the profit module.

Your payroll system may allow you to provide 20 or more “types” of expenses: New York Unemployment Tax, Life

Insurance, Health Insurance, etc. This level of granularity is not required or applicable to profitability analysis. You

will need to rollout these expenses into Profit Accounts such as Salary, Bonus, Benefits, etc.

The table below shows a typical set of Payroll Profit Accounts. Your firm is encouraged to edit the payroll Profit

Accounts and create new payroll Profit Accounts if necessary.

Source Details

COMP-SALARY Salary expenses

COMP-BONUS Bonus expenses. Some firms will create several additional bonus Profit Accounts to be

able to report on different types of bonuses

COMP-PARTNER Partner-specific expenses

COMP-OTHER Can be used to hold retirement account matching, insurance, and other miscellaneous

payroll expenses

Best Practices:

Sticking with the mantra of “Keep it Simple”, we encouraged clients to limit the granularity of payroll

expenses to 4-6 Profit Accounts.


Revenue Data

Revenue data is typically loaded directly from the Iridium BI Revenue module. This assures that the Profit module

and the Revenue module will be in reconciliation. If your firm has not purchased the Iridium BI Revenue module,

we will still get the revenue directly from your PMS.

Revenue Profit Accounts

While there is no limit on how many different types of revenue your firm can track in the Profit Module, typically

firms go with one of these options:

A single revenue account for “Revenue – Fees”, and allocate other revenue as a contra-expense

Two revenue accounts: “Revenue – Fees”, and “Revenue – Other”

Three revenue accounts: “Revenue – Fees”, “Revenue – Fees (NTK)”, and “Revenue – Other”

Revenue “Slices”

Three separate revenue slices are available: Worked, Billed, and Collected. The Worked slice is typically based on

either the "billable" amount or “to bill” amount.

Revenue Data Granularity

The revenue data is loaded at the granularity of period + working attorney + matter. So if an associate had ten

time entries in January on three different matters, then the Profit module would roll that up into three time entries

for the period (one per matter). We will refer to this as a “super time slip”.

Note that any adjustments such as write-downs or write-offs are applied to the revenue in the period that the

write-down or write-off was applied.


HR Data

One of the biggest deliverables of your profitability implementation is to assign and allocate expenses in each

period to the working attorneys in your firm. The costs are then further applied to the matters for that working

attorney in that period. Since many allocations are based on the office or title of the working attorney, it is

important that you have accurate assignment data for each working attorney. Specifically, you need to load the

office, department, team, and title for each working attorney (note that “title” is the Iridium BI nomenclature for

“rank” for ADERANT clients). Additionally your firm will need to load the FTE for each working attorney in each

period.

Defining Working Attorneys

Only people that are defined as working attorneys in the Profit module will be able to receive allocations and keep

their direct expenses and revenue. That does not necessarily mean that all people who are working attorneys in

the Revenue module must be working attorneys in the Profit module. We can configure special rules tailored to

your firm to determine who is and who is not a working attorney in the Profit Module. For example, you may have

a certain group of people who could be described as assistants but they still may be doing some work and

generating some revenue. Typically if you do not want to measure the profitability for these people you would not

define them as working attorneys in the Profit module. In this case they would not get any expenses allocated,

and all of their revenue could/would be reallocated to the real working attorneys.

Defining the exact list of working attorneys in a year (or period) is the key aspect of the Profit

implementation!

Your firm will use the table below to define the working attorneys within your profit module implementation:

Item Details

What is the Working

Attorney Criteria?

ADERANT clients: Will the Profit module working attorneys be defined using Ranks

(Title) or Personnel Types?

Elite clients: Will the profit module be implemented using Title?

What are the other criteria for defining working attorneys?

Which Titles/Personnel

Types are Working

Attorneys?

Based on the working attorney criteria, we will create a list of the titles/personnel types

that will be considered working attorneys

Your firm will have the chance to define rules for who is a working attorney in a period

to handle your exceptions. For example your firm might have a rule the associates are

not considered working attorneys in their first period after joining the firm while they

go through training.


Working Attorney Assignments and FTEs

Each working attorney must only have one assignment in each period determining the Office, Department, Team,

and Title for the employee. Additionally, each working attorney should have an FTE greater than zero in any

period where they will receive expense allocations (depending on the allocation rules).

Your firm will use the table below to describe the handling of assignments and FTEs within your profit module

implementation:

Item Details

What is the source of the HR

Data?

What is the system of record for Office, Department, Team, and Title assignments? Is it

Payroll, the PMS, or a spreadsheet?

What is the system of record for FTE values? Is it Payroll, the PMS, or a spreadsheet?

The ideal source for all of these values would be the PMS

What is the granularity of

the Title data?

Does the system of record provide the same Titles as defined in the previous section,

or will there be a mapping/translation required?

Note: Loading and validating assignment and FTEs for all working attorneys is a key implementation deliverable.

Your firm needs to make sure that there are no gaps (missing assignments, working attorney with hours but no

FTE, etc.).

Title Point Profiles

Many firms want to define allocations where different Titles get different allocations, for example “partners get 3

points, associates get 2 points, and other working attorneys get 1 point. Here is a sample set of Title Points:

Note: instead of Title, ADERANT clients can use Personnel Type or Work Type.


Title Point Profiles are the mechanism to define and apply title points to allocations. Each firm can define as

many Title Point profiles as they need, and then assign point values to each Title in the profile. For example a

firm might define two Title Point Profiles: “All Working Attorneys”, and “Lawyers Only”. The power of having

multiple point profiles is that you can set up allocations (for example) where only partners or only lawyers receive

expenses. It is not a requirement that a title has the same points in all profiles; i.e. partners can have 3 points in

one profile and 2 points in another

These are the examples of common Title Point Profiles:

Title Point Profile Details

ALL-WA All working attorneys will receive expenses based on their assigned points

LAWYERS-ONLY Only lawyers will receive expenses

PARTNERS-ONLY Only partners will receive expenses

Note that the granularity of the Title Point Profiles is based on the Titles that your firm has chosen. So if you are

loading two types of partners such as equity and non-equity, then you can assign them different points within

Point Profiles, or even have separate Title Point Profiles for PARTNERS-EQUITY and PARTNERS-NON-EQUITY.


Profitability – Allocation Process

We have covered most of the profitability concepts, and we now get to the heart of the profitability calculations.

This section covers the allocation process in detail, and introduces the key concepts of allocation methods,

groups, and rules.

Allocation Methods

An “Allocation Method” defines a method for allocating expenses based on a weight calculated from Title Points

(weightings), FTEs, Headcount, or any other value. Your firm is provided with a “blank whiteboard”: there are no

restrictions on how many methods can be defined, and you can define new allocation methods.

The methods listed below have been pre-defined in the Iridium BI Profit Module. Again, consider this list to be a

starting point. If your firm requires a custom allocation methods such as “based on shareholder points” then

Iridium can implement that method for you. Note that Iridium has done dozens of custom allocation methods for

our clients, and we have never been stumped.

Typically the allocation process is a two-level allocation. Technically this may happen in one step but conceptually

we allocate the expenses first to working attorneys and second to the working attorney’s matters. Please note all

of the following allocations methods allocate to both levels. Since the matter allocation is almost always based on

hours worked on each matter we talk about the methods from the perspective of the first level only (the working

attorney level).

Method Details

Title Points – FTE Adjusted This method defines points for each Title. For example: Partners 3, Associates 2,

Paralegals 1

The expenses are then further adjusted by FTE, so a .5 FTE working attorney will only

receive half of the expenses that a full-time working attorney with the same rank will

receive.

Note Title can be substituted with Personnel Type

Title Points - Headcount Same as above, but with no FTE adjustment

Billable Fees Working attorneys with larger billable fees will receive more expenses

Billable Hours Working attorneys with larger billable hours will receive more expenses

(No Allocation) This is not actually a method, but is included here to indicate that some

expenses/revenue will pass directly through the profitability processing engine and

remain with their associated working attorneys (and matters)

While this method is typically only used for direct expenses such as compensation,

occasionally clients will directly assign overhead expenses. As an example, training

might be considered as overhead, but the training expense for an individual might be

loaded and assigned only to that individual.

(Matter Only Allocation) Similar to the previous method

If the expenses/revenue is already stamped with working attorney but not yet with a

matter we still need to allocate these WA expenses to their matters.

Typically hours worked are for this allocation


Assistant Assignment Allows you to define percentage share of assistant assignment for allocation of costs.

“That assistant is assigned 30% to partner X, so partner X will receive 30% of that

assistant’s expense

Office Square Footage Allows you to define percentage share of occupancy expenses based on office square

footage for each working attorney

“Partner X has an office of 200 square feet. The total office space is 1000 square feet,

so partner X will receive 20% of the occupancy expense for the office.

Custom (non-standard)

Allocation Methods

For example: Allocate by partner shares. If you require custom methods, Iridium is glad

to discuss options with you. And again, we have not been stumped yet…

Best Practices

It is suggested to stick with just a couple allocation methods, and many Iridium clients are satisfied using

only the method “Title Points – FTE Adjusted” for all allocations

Note that you can still filter groups of working attorneys out of expense allocations. For example you can

allocate partner retreat expenses using Title Points – FTE Adjusted, but limit the recipients to senior

partners (2 points) and partners (1 point)

Allocation Groups

An “Allocation Group” defines a business unit that will receive allocations. There are no restrictions on how many

groups can be used by a client.

These are the default Allocation Groups:

Firm-wide: Allocate the expenses to all working attorney across the firm, regardless of the office or

department where the expenses originated

Office: Allocate these expenses only within the office where the expenses originated

Department: Allocate these expenses only within the department where the expenses originated

Office+Department: Allocate these expenses only within the office and department combination where

the expenses originated

Team: Allocate these expenses only within the team where the expenses originated (Team can be team,

profit center, etc. – any grouping that transcends the Office+Department hierarchy.)

Office Group and Department Group are also supported (“super office” and “super department”)

Firms can also define other allocation groups, but we have found that the above allocation groups cover the

needs of the vast majority of firms.


Allocation Rules

Rules allow the firm to combine Allocation Methods and Allocation Groups with Profit Accounts. Each rule

defines a set of expenses (“Rent and Occupancy”) and a set of filtering criteria (typically tying it to one or more

Profit Accounts) and an allocation method.

Example of Rules:

For Office “HQ”, allocate the “IT” Profit Account expenses using the Allocation method “Partner 2, Others

1”, keeping the expenses within Office HQ

For all Legal Departments, allocate the “Training” Profit Account expenses using the allocation method

“Billable Fees” allocating the expenses across the same department across all offices

Note that the order that rules are applied is important. Think of a sieve: after rule #1 is processed, those expenses

will not be picked up by any following rules. After all rules have been applied, there should be no expenses that

remain unallocated. If there are leftover expenses, then the firm will want to define a “wash-up rule” to make sure

that any expenses that were skipped are allocated to working attorneys.

The “Wash-up” Rule

As we mentioned above the rules are working like a sieve. In some cases there will be some expenses left in the

sieve after all the rules have been applied. This typically occurs in with allocations by office + department, where

there is no working attorneys in an office + department combination during a period. To make sure that all

expenses will be allocated to working attorneys, we can define a wash-up rule. A typical example of a wash-up

rule would be “take any expenses that were not allocated and push them out by office using Title points. The

firm can actually then define a final wash-up rule to “take any remaining expenses not picked up by the first wash-

up rule and allocate them firm-wide using Title points”.

Best Practices

For firms that have simple allocations and rules, a wash-up rule is typically not necessary. This also

provides for a good validation: if there are any expenses not allocated then we need to investigate why.

As your firm defines more granular allocation rules, the chances of requiring a wash-up rule go up.

Specifically when you have rules that are doing allocations within the office + department combination,

then there is a good chance that you will get unallocated expenses.

For firms that require a wash-up rule, we prefer to keep expenses either in the office or department

(choose one). We like to avoid a firm-wide wash-up rule just because it tends to push a lot of small

expenses out widely. That being said, a firm-wide wash-up rule can be appropriate for the “final wash-

up”.


Dimensions for Analysis

Once the allocations have been applied, users can analyze and report on profitability using the following

dimensions that are defined in the profit cube:

Dimension Description

Office Included in core product

Department Included in core product

Team Included in core product

Title Included in core product

Office Group/Department Group Included in core product

Working Attorney Included in core product

Matter Billing Attorney Included in core product

Participating Attorney Included in core product

Parent Client / Client / Matter / Payor Included in core product

Additionally, you can slice/filter by

attributes on the clients and matters

Included in core product: Matter Type, Client Type, Open Date, etc.

Are there any additional groups or

filters that your firm requires?

Iridium can configure/customize the dimensions and attributes supported

based on your firm requirements

Best Practices

It is strongly suggested to stick to a dozen or less rules.

The simplest implementations that Iridium has seen have as few as 3-4 rules

The most complex implementations can have 30-plus rules, but we encourage your firm to reduce the

count

Without a doubt, the firms that have fewer rules are happier with their Profit cube: the processing is fast,

the numbers are easy to validate, and the expense allocations can be easily explained to the partners.

More rules means: slower cube processing, slower queries, lots of exceptions that are difficult to explain,

and a cube that is generally tough to validate.

“Cube Defensibility”: this is the concept that when a working attorney questions their expense rate of

profitability, you can easily “defend” your stance that the cube results are valid and fair. If you have 10+

rules the cube is not easily defensible: Any good lawyer will have plenty of arguments as to why one or

more of the rules is unfair and should not apply to them.


Iridium’s Profitability “Thesis”

Law firms have been doing profitability analysis for decades, and they have always been limited by the capabilities

of their systems and applications. This has resulted in the adoption of “best practices” methods that in many

cases have severe shortcomings and distort the true profitability statistics.

Iridium is pleased to offer a solution that offers multiple scenarios for how firms can calculate profitability, and we

will cover those scenarios in detail in the next section. But before we introduce you to the profitability scenarios

that are available, we want to have a general discussion about our new TrueProfit method which allows law firms

to calculate profitability with far greater accuracy than has been previously achieved.

This is our thesis for law firm profitability calculations:

Every worked hour has a single cost, and it should only be calculated in the work period

There are two basic profitability scenarios: start with the work expense, and start with the collections

If you start with the work expense, then you must move forward to get to the associated collections

If you start with the collections, then you must move backwards to get to the associated work expense

Any method that calculates profitability where the expenses are not strongly tied to the collections is

inherently flawed

To understand Iridium’s thesis, let’s look at a couple simple profitability questions:

Question Traditional Answers Iridium TrueProfit Answer

We collected $60,000 this

month from Client X for

Richard’s work. What was

our profit for Client X on

those collections?

Option 1: That $60K represents 150 hours

collected. Richard’s cost rate this month

is $300/hour. Therefor the expenses

should be $45K, and the profit is $15K.

Option 2: Richard’s expenses this month

were $40K. The total collections this

month were $120K. So the $60K in

collections should get half of this month’s

expenses. So the expenses are $20K, and

therefore the profit is $40K

Many other options are available, but they

all have the same flaw that the work

expense is based on Richard’s current cost

rate.

That work was performed 4-6 months

ago. We will go back and get the cost

of the work based on Richard’s costs in

those prior months. We come up with

an exact cost for the work performed of

$25K, so the profit is $35K. That is the

only correct way to determine

profitability.

Richard did $100K in Billable

Work this month. What is

the profit on that work?

Richard’s expenses this month are $40K,

so the profit is $60K. We understand that

this is just an estimate, but it is the best

we can do. Once we know the final

collections we can tell you the

profitability.

But the problem is we will then use the

traditional method above and the

expenses will be calculated based on

Richard’s cost rate at the time of

collections.

We will not know the exact profit until

we see how much is billed and how

much the client pays. But in the interim

we can offer you three profit scenarios:

Optimistic, Pessimistic and Expected.


What was our profit on

Richard in 2014?

Option 1: We collected $800K, and his

expenses in the year were $380K, so the

profit was $420K

Option 2: Richard had $900K in

billable/billed wok, and his expenses were

$380K, so the profit is $520K.

Again, there are many options but they all

have the similar mismatch between

expenses and collections.

We can do those traditional methods –

no problem. We understand why you

might want to use them for the annual

review of your working attorneys and

other scenarios.

We also offer the TrueProfit views which

offer three choices for

projecting/estimating future profit. And

we want to emphasize that the

TrueProfit views are especially

applicable to looking at client or matter

profitability.

The biggest problem with the traditional methods is the time shift between expenses and revenue, and this is

manifested in several unwelcome side effects:

If you look at a working attorney’s profitability for the year based on collections, a large percentage of the

collections may have incorrect costs since the expenses are from this year’s work and a large percentage

of the collections are from the previous year’s work

Departed timekeepers can overstate client or matter profitability since the departed timekeeper may have

zero expenses in the period the revenue was collected

(etc.)

Note that we classify all of these side effects as “time shift” issues.

So how does Iridium solve the time shift issues? The key element is being able to slice our data by work period.

This works in both directions:

If you are starting with the work expenses, for revenue we only bring in the collections that are associated

with the work period that the work was done

If you are starting with the collections, we go back to the work period when the work was done to get the

expenses

In conclusion, we urge clients to avoid the traditional methods, and if they are going to use them to be sure to be

aware of the shortcomings.


Profitability Scenarios

Now that we have covered the basics and introduced our profitability thesis, let’s look at the options for

profitability analysis which are supported in Iridium BI. Note that multiple scenarios are supported simultaneously

– there is no need for the firm to make a choice of one scenario exclusively.

Iridium BI: Six Profit Scenarios

Based on feedback from our clients and prospects, Iridium has implemented six distinct scenarios that are

available for profitability analysis. Again, the firm is not required to limit themselves to one scenario; all six

scenarios are available and the firm can choose in which situations each method is appropriate. One note of

caution: while our product can support multiple scenarios simultaneously, we encourage firms to limit the number

of scenarios in order to maximize cube performance and reduce processing time.

Work Period Basis (Recommended)

In the Work Period basis we look at a block of work that is constrained by a Work Period. For example: looking at

the work Jennifer did for Client X in 2014, what is the profitability? We offer three scenarios: Optimistic,

Pessimistic, and Expected. Each scenario has a different revenue calculation, but in all scenarios the expenses

remain constant. These are our preferred scenarios for profitability analysis because it accurately ties the expenses

of the work exactly to the cash that is collected and also accurately projects future profitability.

Emphasis: The Work Period Basis is starting with the expenses, and tying them to the future collections.

Scenario Details

Profit Worked -

Optimistic

We start by looking at the work in a Work Period, and assume all WIP and AR will be billed

and collected. So Revenue is equal to Fees Collected + WIP + AR on the work.

This scenario assumes that no WIP or AR will be turned into additional write-downs or write-

offs. Note there may be existing write-downs or write-offs

Comments: While this scenario is available and fully supported, we think that most people

would agree that this is not a realistic outcome. We do not consider using the Optimistic

scenario to be best practices.

Profit Worked -

Pessimistic

Revenue is Fees Collected to date, and the matter has negative profitability until the

expenses are covered

This scenario assumes that all WIP or AR will be turned into additional write-downs or write-

offs. Note there may already be existing write-downs or write-offs.

Comments: This scenario is Iridium’s second choice, and for several of our clients it is their

first choice. An advantage of this scenario is that it really puts pressure on the partners to

make collections so that their profitability statistics will improve.


Profit Worked -

Expected

Revenue is Fees Collected + expected WIP + expected AR collections. The expected

component is saying that there is WIP and AR associated with this work, and it is likely that

we will bill/collect some of it.

Our default implementation is to apply the historical billing and collection realization rates to

the WIP and AR on a per-client basis

Clients can define their own custom calculations for expected realization of the WIP and

AR. (One possibility would be to consider the age of the WIP/AR as a factor in calculating

the likelihood of eventual collections.)

Comments: The Expected scenario certainly is the best scenario to use when reporting in

profitability for matters where there is open WIP or AR. We recommend this scenario as best

practices. This is a very powerful scenario for forecasting expected profit on work that has

been done in the current year.

Important Note: At the point that there is no open WIP and AR on a matter, then all three scenarios return the

same profitability value.

This diagram may help you to better understand the Work Period basis scenarios:

For all three scenarios the expenses are identical (Expense Worked)

The Achieved Revenue component is what is considered as “in the bag”. For Optimistic this is everything

– the firm can choose if they want to base it on Fees Worked or Fees Billed (filtering by Work Period). For

Pessimistic is the Fees Collected (filtering by Work Period). And for Expected it is Fees Collected + the

expected recovery of the WIP and AR.

The Lost Revenue is the Fees Written Down and Fees Written Off.

The Potential Revenue is the current WIP and AR. Eventually this will go to zero, having being converted

to either Achieved Revenue or Lost Revenue.

Focus: The Impact of write-downs and write-offs (Profit Worked scenarios): The optimistic / pessimistic /

expected profit is based on collections, WIP, and AR. Write-downs and write-offs are not directly included in the

profit calculations, but they have the indirect impact of reducing WIP and AR and therefore reducing profitability.

Stating it another way, write-downs and write-offs do not reduce expenses since the expense for the work is

calculated at the time the work is done.


Since write-downs and write-offs still carry the expenses of the associated work, we have included two measures

to track those values: [Cost of Write-Downs] and [Cost of Write-Offs]. These measures (like all other measures in

the Profit cube) can be sliced at the working attorney + matter + period granularity.

Profit Collected Basis (Alternate Scenarios)

This basis starts with the Fees Collected in a period, and then provides three scenarios for determining the

expense component.

Scenario Details

Profit Collected -

Proportional

We start by looking at the collections, and go back to locate the work expense associated

with the collections. Note that the expenses are most likely spread across multiple prior

periods.

We identify the cost of the work associated with the collections versus the total work in that

work period, and then check what portion of the revenue in that period has been

collected. This allows us to get the proportional expenses based on the collections.

If (for example) 50% of the revenue has been collected, we then allocate 50% of the expenses

to the work.

Let’s look at a matter with $500 in expenses and $1,000 in Billed Revenue. We have collected

$500 – 50% of the Billed Revenue. The expense of the work collected is 50% of $500 --

$250. So on the work collected so far, we have made a $250 profit.

Comments: We are lukewarm on this scenario. We are supporting it because there is some

interest from the client base and prospects. We have several concerns with this scenario: (1)

it is that it is not predicting an accurate outcome – the expenses are already a sunk cost, so

we dislike only reporting a portion of the expenses. (2) AR and WIP do not have associated

expenses, so if there is open WIP and AR this can overstate profitability.

Despite our concerns, we feel that this is the best scenario for answering the question “What

was our profit on that $100K we just collected?”

Profit Collected -

Cost Rate

For this scenario we first determine the Hours Collected, and then multiply the hours by the

Cost Rate in the current period to come up with Expenses

We support this scenario primarily for legacy reasons for some of our long-time clients

Comments: Our concern with this scenario is that the cost rate in the current period can be

widely divergent from the cost rate at the time the work was done. Many clients using this

method will move to YTD or R12 analysis to smooth out the cost rates, but we view this as a

Band-Aid instead of an accurate solution.

Another shortcoming with this scenario is that for AFA or Contingency matters the Collected

Hours may not be accurate (or may not even exist), and this results in inaccurate expenses

This is our least favorite scenario, and we disable it for most clients. Additionally it is

the scenario with the longest cube processing and slower queries.

Profit Collected -

Hybrid

This scenario is simply looking at the raw data in the period. For example, what were

Jennifer’s collections and expenses in 2014?

This scenario works well for ranking working attorneys (etc.) for profit contribution during the

year

The user needs to be aware that there is a mismatch between revenue and expenses (time

shift)


This diagram may help you to better understand the Collected Period basis scenarios:

For all three scenarios the collections are identical (raw Fees Collected in the period)

WIP and AR are not included in the calculations, so there are no expenses associated with the WIP and AR.

This overstates the profitability of matters with open WIP and AR.

Fees Written Down and Fees Written Off are properly assigned their associate work expenses

The big difference between the three scenarios is that each scenario has a different expense calculation,

Best Practices

When selecting Revenue Scenarios the best practice is to “use the scenario that your firm likes, but be

aware of the pros and cons of that scenario”. Additionally, your firm could use different scenarios for

different profitability reporting and analysis scenarios.

Iridium has a strong preference for the “Worked Period” scenarios since these are the only scenarios that

tie the expenses to the collections. In order of preference:

(1) Profit Worked – Expected

(2) Profit Worked – Pessimistic

(3) Profit Worked – Optimistic

When using the Profit Worked - Expected scenario, we encourage clients to modify the calculations for

the realization factors. Additionally we think that this should be based on per-client histories rather than

firm-wide or office-wide histories.

When looking at profitability on collections, we recommend the Collected Period – Proportional scenario.


Flexible Profitability Analysis

Iridium understands that clients have different reporting scenarios and we would never insist that clients use a

single set of profit numbers for all analysis situations. Iridium BI has several features and capabilities that allow

firms to modify the expenses, revenue, and hours to be included based on their profitability analysis requirements.

Note that we have already covered your firm choices for multiple revenue scenarios in the section above. This

section covers scenarios in general, and some available options for expenses and hours.

Scenarios

Scenarios allow firms to see multiple views of their profitability data and to switch between those views. So if we

look at the Revenue Scenarios discussed in the previous section, the firm might elect to implement three of the

seven scenarios. These scenarios would then be available in the Scenario dimension. Within Iridium BI we create

scenarios that combine different views of expenses and revenue. Firms that elect to implement the Cost Rate

method can also choose the hours to be used in different Cost Rate scenarios. This is an example of the scenarios

that might be implemented at a client. Note that the (Internal) scenarios are used to build the other scenarios and

for diagnostic purposes by Iridium. The Internal scenarios and should not be used by power users:

Filtering Expenses

The filtering capabilities of Excel can be used to build custom filtering into your pivot tables (and into our

dashboards). An example might be that you want two views on profitability: one that includes partner bonuses

and one that excludes partner bonuses. You can easily accomplish this by including/excluding the Profit Account

for “PARTNER-BONUS” in your analysis.


Cost Rate Types/Periods

This only applies to the Profit Collected (Cost Rate) method. In the Cost Rate method, you can choose which type

of cost rate you want to use for calculating costs. Multiple cost rate data sets allow firms to perform reporting

and analysis using multiple sources for hours such as “Monthly”, “Annual”, or “R12”. There are dimensions “Cost

Rate Type” and “Cost Rate Period” that can be used to switch the cost rate calculation when using the Cost Rate

method.

Additionally, firms have the option of defining additional cost rate data sets.


Best Practices Topics

As the number of implementations of Iridium BI grows, our knowledge of best practices implementations also

grows. Clients regularly ask our advice on best practices. This section covers the most common topics for

discussion. For each topic we summarize the issue, discuss the options, and identify our preferred solution.

Should your Profit Cube Reconcile to your Income Statement?

If your Income Statement show $100.3M in revenue and $60.3M in expenses for a profit of $40.0M, should you

see the same numbers in your profit cube? This is a key question which impacts many or most of your profit

implementation decisions. Let’s look at the pros and cons of each strategy…

Strategy Details

Reconcile to GL: Pros There is only really one benefit: you can show the partners that your profit cube

reconciles to the same firm wide profit number as the GL produces

Reconcile to GL: Cons You will be required to load ALL expenses into the Profit cube – you cannot exclude

expenses that might not apply to profitability analysis

If you allocate expenses between office, departments, or teams then the GL and the

cube will not reconcile by those slices

Specifically: if you allocate any journal entries to a working attorney in different

Office+Department+Team than are stamped on the transaction then your

“reconciliation to the GL” has been broken.

Since almost all firms will do at least a couple firm-wide allocations, it is actually not a

valid goal to say that your profit cube will tie to the GL at slices such as Office,

Department, Office+Department, etc.

You cannot take advantage of strategies such as contra-expenses and expense

smoothing because then your revenue and expenses will not tie to the GL.

In summary you are placing restrictions on your ability to choose appropriate expenses

and allocate expenses across entities.

Do Not Reconcile to GL:

Pros

No limits on allocating or moving expenses (or revenue) between offices, departments,

teams, etc.

No limits on strategies like contra-expenses, one-time reassignment of expenses,

putting in a plug for Partner Draws, etc.

Do Not Reconcile to GL:

Cons

None really. You just need to be able to explain the strategies and differences to the

firm partners

Best Practices:

Reconciling with the GL based P&L is overrated because you are limiting your implementation choices.

For example: many firms decide to reallocate non-working attorney revenue as a contra-expense,

resulting in differences versus the GL in both expenses and revenue. If you have set the goal of

reconciling with the income statement then this option is not available to you.

Do not set expectation of reconciliation. Your response if someone questions this decision is that “We

have financial reports – the profit cube is optimized for profitability reporting and analysis”

Important: Proportional method means you will not tie to cash basis (annual) financial reports


Expense Smoothing

Smoothing is used to evenly distribute expenses across multiple periods. This allows you to avoid the situation

where a partner gets a $200K bonus in June and then all work in June has higher expenses and look less

profitable.

Iridium can implement any smoothing strategies that your firm would like to see, and without limitation. Note

that since the smoothing is done before the cube is processed, you cannot switch between smooth or original

expenses while working with the cube.

Best Practices

While this is a firm choice, in general smoothing is a good idea – especially for making sure that large

expenses like partner bonuses are spread across all months

Note that if you smooth expenses, then the profit cube expenses in each month will no longer reconcile

to the GL expenses in each month

If you do not smooth then the expenses will tie to the GL, but you will see large variations in monthly

expense rates

Reporting on a rolling 12 basis is another smoothing strategy

Each firm needs to determine if they want to do (1) no smoothing, (2) only smooth a subset of expenses,

or (3) smooth all expenses

Part-Time Working Attorneys

Most firms want to avoid having part-time working attorneys get more than their share of the expense allocations.

Iridium offers multiple options to accomplish this, with the most common being that allocations are FTE-adjusted.

For example, a 2-day per week employee would only receive 40% of the allocation of a full-time employee.

For working attorneys with very low hours, many firms choose to just treat them as non-working attorneys, and

allocate away both their revenue and expense.

Best Practices

There are two best practices options…

(1) Treat part-time working attorneys as non-working attorneys and either suppress or allocate all of their

revenue and expenses

(2) Modify their Allocation Factor to reflect their part-time status, and they will receive a pro-rated

(smaller) allocation of expenses


Working Attorneys with Low Hours (Rainmakers, Others)

Certain working attorneys will always have low hours, and the best example is probably rainmakers. Since they

have low hours, the expense associated with those hours will be high. Making it worse, in many cases the

rainmaker is a highly compensated individual. Iridium BI offers three strategies for properly costing working

attorneys with low hours:

Strategy Details

Adjusted Hours

Support

This feature allows firms to adjust the hours for a selected group of working attorneys.

Typically this scenario is used to adjust hours upwards for working attorneys with low hours

(but it could also be used to adjust hours downwards)

There are two methods to adjust the hours: rules and hours adjustments. Here are samples of

each:

o Rules: Increase all associates with less than 80 hours in 2014-01 up to 120 hours

o Hours adjustments: Increase Jennifer’s hours by 100 hours in 2014-01

The adjusted hours are all associated with a PLACEHOLDER matter

Once the hours adjustments are loaded into the cube, the firm is able to report on actual hours

versus the adjusted hours by the use of the PLACEHOLDER matter

Expense Exceptions This feature allow firms to reduce expense rates for working attorneys by reducing their

expenses

Typically this scenario is used to decrease expenses for working attorneys with low hours, but it

could also be used to decrease/increase expenses for any working attorneys

There are two methods to adjust the hours: rules and expense adjustments. Here are samples

of each:

o Rules: Decrease expenses by $100,000 for all partners with less than 50 hours in

2014-01

o Expense adjustments: Decrease Jennifer’s expenses by $50K in 2014-01, and

decrease Joseph’s by $80K

The expense exceptions are all associated with two firm-defined Profit Accounts, for example

“EXP-EXCEPTION-CREDIT” and “EXP-EXCEPTION-ALLOC”. In the example above with Jennifer,

she would receive a $50K CREDIT, and the $50K would be pushed out to other working

attorneys as an allocation (where the firm determines the rule).

One the expense exceptions are loaded into the cube, the firm is able to include/suppress them

in profitability calculations by including/suppressing the associate profit account in queries and

reports

Reduce Allocation

Points

Assign the rainmakers or other working attorneys with low hours a lower value for allocations

points, which will reduce their share of the expenses.

Example: As a partner, William should get 3 points for allocations. But we are changing William

and two other rainmakers to only receive 1 points, therefore cutting their expenses down to

33% of the normal amount for partners.

Best Practices

We have seen all three of these methods in use at our clients. Our preference is for the Adjusted Hours

Support based on rules. It is easier to get buy-in for “we are giving all partners with less than 80 hours in

a period an hours adjustment of 40 additional hours” than it is to get agreement on “Jennifer gets a

$100K expense credit, but William only gets a $50K credit.”

Another scenario where hours adjustments are sometimes used is for new hires. Since they need to “get

up the speed”, the firm may give them (for example) 50 hours of credit during their first three months.


Split Assignments

Split assignments are the situation when you have a working attorney that is assigned to two departments, offices,

teams, or titles. For example James is a partner, and he is split between the San Francisco and Palo Alto offices on

a 60/40% ratio.

Iridium BI does not natively support split assignments. While we have not ruled it out the future, our current

stance is that it is not worthwhile to add additional complexities to the product to handle this occasional situation,

especially when we have two reasonable workaround options.

Best Practices

There are two best practices options…

Strongly recommended: Do not implement split assignments, and assign each working attorney to a

single Office, Department, Team, and Title

If you insist on split assignments, you need to define two versions of the working attorney (James #1 and

James #2). You will need to split the payroll expenses before loading. You can report on “combined

James” by selecting the two separate person records.

Non-Working Attorney Revenue

Most law firms have situations where a non-working attorney may occasionally bill some time. Typically non-

working attorney (“NON-WA”) revenue is only going to be 1-2 percent of total firm revenue, but you still need to

have a strategy to account for it in your profitability analysis. Here are several strategies for handling NON-WA

revenue:

Strategy Details

Allocate to other WAs as

“other revenue”

Pro: Total Revenue will tie to the GL

Cons: Total Revenue for individual working attorneys will be overstated

Allocate to other working

attorneys as contra expense

Pro: Total Revenue for individual working attorneys will be correct. Expenses for

working attorneys will be reduced, but in a subtle way

Con: Total Revenue will not tie to the GL

Assign to “PLACEHOLDER”

working attorney (not

recommended)

Pro: Individual working attorney revenue and expenses are not changed

Con: You will have the “PLACEHOLDER” working attorney in all your reports

Treat the non-working

attorneys as working

attorneys (not

recommended)

This means that the non-working attorneys will be tracked as working attorneys in

your reports and the cube

Pro: You see the actual hours and collections of the non-working attorneys

Con: Your cube and reports have distracting/non-essential employees lists

Suppress It (not

recommended)

Do not load the revenue for non-working attorneys

Pro: Non-working attorneys do not show up on your reports

Cons: You cannot tie out revenue by total firm, client, etc.


Best Practices

These are the two best practices options that we like, listed in order of preference

(1) Assign it to other working attorneys are “Other Revenue”

(2) Allocate it as a contra expense

Departed Working Attorneys

How should we treat revenue and expenses for working attorneys that have YTD values but are no longer with the

firm? Departed working attorneys are a recurring source of data discrepancies since they are still getting

collections credit, and sometimes they also have expenses. There are two basic options:

“The Reality Option”: If the working attorney was there for part of the year, then they should be left in

the profit cube and the revenue and expenses will stay with the working attorney. They will receive

expense allocations for the periods where they were active at the firm. We actually recommend keeping

them active as a timekeeper through the end of the year so they will receive both expenses and credit for

their collections for their work even after they have left the firm. To implement the Reality Option you

leave in assignment and FTE data for the departed working attorneys in the periods that they were at the

firm, and even flag them as timekeepers in periods after they left. There are several advantages to this

option: (1) it reflects what actually happened, (2) there is no re-writing of history (reports that were

distributed before the working attorney left are no longer valid), and (3) working attorneys that are still

with the firm will not see changes in their actual numbers for revenue due to revenue assignment for the

departed working attorney.

“The Disappearing Act Option”: When the working attorney leaves the firm the FTE and assignment

records in the YTD prior periods are overwritten, so it appears that that the working attorney was not at

the firm this year. All of their revenue is treated as non-working attorney revenue and reallocated by

whatever rule was set up for NTK revenue. All of their expenses are pushed to other working attorneys

based on the expense allocation rules that your firm has configured. This method is not recommended

since it is taking you further from the truth of what really happened.

Best Practices: We recommend the Reality Option.

Partner Compensation/Draws

Partner compensation and draws are major expenses, and you cannot get accurate profitability values without

handling these expenses properly. For example, if your firm gives draws in March, June, and September, then your

YTD expenses during January and February will be lower than they should be. In March when the draws hit you

are closer to reflecting the actual year end expenses, but the expenses are still understated if the draws are only a

partial estimate and there will still be a big final payout in December.

Best Practices

There are two common best practices options…

(1) Most firms choose to load in a “plug” value for partner compensation during the fiscal year. This can

either be the same value for all partners, or individual values can be entered for partners. The plug value

is independent of the draw amount – it is the best estimate of the total partner compensation for the year.

This provides stable/fair profit analysis during the financial year. Once the financial year is completed, the

actual compensation values for each partners are back-loaded.


(2) Load in the partner draws throughout the year with the actual draw amounts. Also enter an additional

plug that contains the difference between the draw amount and the expected total partner compensation

for the year. Once again, load the final partner compensation values when they are available.

Note: We strongly recommend smoothing Partner Compensation across all YTD periods, otherwise fair

analysis cannot be performed on clients/matters that had time worked in the periods where the draws or

other partner payments occurred.

Profitability Information Access

This is a very important topic: who in the firm will be able to view profitability reports and data, and what will they

be able to see? There are three common strategies (and one uncommon one!):

Strategy Details

“Tightly Held” Access to the profitability data is limited to a small group of 3-5 people in the firm, typically

only finance staff and the Managing Director

This group reviews the profitability data, and when they notice a situation that requires action

they have a “quiet talk” with the appropriate manager or working attorney

Typically there is no distribution of any profitability reports

“Managers” In addition to the Tightly Held group, the Department Heads or other managers are given

access to profitability data

Client/Matter Responsible Partners might also have access to profitability on their

clients/matters

With this strategy it is typical that the users get access to profitability data either through

dashboards or reports

“All Partners” In addition to the access detailed above, all partners are given access to their own slice of the

profitability matters

Partners are given reports or dashboards so that they can see their personal contribution to

firm profitability, and their performance on their individual clients and matters

They can also see their performance as an Originating or Client/Matter Responsible Partner

Additionally they can view the profit contribution of the working attorneys that have worked

on their matters

“Wild West”

(Uncommon)

All Partners can see the profitability data for the entire firm, including the profitability

contribution of the other (named) partners

We have not seen this seen this with any of our clients, but I did demo for one firm that used

this strategy

Best Practices

This is highly dependent on your firm culture, so the only best practices advice is to distribute the profitability

results as widely as your firm is comfortable, and continue to see if you can distribute them further each year.

Profitability Dashboard Access

Quick follow-up topic: Iridium offers role-based Profit module dashboards for Executive (Total Firm), Office

Manager, Department Head, Team Leader and Participating Attorney (Originations, etc.). If your firm will be

deploying dashboards you will need to determine which roles you will be rolling out.


Special Topics

Bring us Your Toughest Customizations!

At Iridium we strongly believe that all law firms are unique, and we need to cater to your special requirements. In

the discussion above, did we miss anything? If so, here is your opportunity to capture and document any special

requirements for your firm. Please think about these questions as you plan your implementation, and bring any

special requests to us for discussion.

Note that in the history of the firm Iridium has delivered 2000+ customizations for our clients, and we

have never once been unable to deliver on a customization request.

Question Sample Answers / Comments Firm Answer

Is there anything unique

about… your firm’s

profitability reporting

requirements?

Yes – because we handle 500,000+ small

matters each year we might have performance

issues for client/matter analysis



profitability allocation

methods?

Yes – we define some ranks as working

attorneys for some expenses but not for others

Yes – our last vendor told us that we made

everything “insanely complicated”



profitability reporting

requirements?

Yes – we have a set of profitability reports that

we have been using for the last 10 years. We

are going to need to reproduce matching

reports off your solution.

(Please add rows to this

table if necessary)

Handling Exceptions

Exceptions are a special case of customizations, typically focused around a couple working attorneys or clients.

Think of it this way: a customization example is “combine paralegals with law clerks for profitability reporting”. An

exception would be “combine paralegals with law clerks for reporting, except for James and Susan who need to be

handled differently”. While we encourage clients to limit exceptions, we also acknowledge that there are valid

business reasons for some exceptions.

Best Practices:

There should be no limits on exception handling

We prefer data driven solutions – i.e. avoiding hard codes. So in the example above we would not hard-

code “except for James and Susan” into your implementation. Instead we would set up a table to track

special paralegals, and the firm can then change who is assigned to the exception with no intervention or

code change from Iridium


Loading Data from External Data Sources

Every Iridium Profit module implementation is already loading data from the payroll application, so we are

comfortable with bringing in external data from other systems. We actually consider bringing in external data to

be a standard implementation. For example, with our Revenue module most clients bring in at least one external

data source. Common external data sources:

Spreadsheets or custom tables for FTEs (Revenue/Profit)

Custom tables in the ADERANT/Elite databases with custom client attributes (Revenue/Profit)

Spreadsheets or custom tables with target/budget figures (Revenue/Profit)

Spreadsheets of custom tables with profit expenses or setup data

(etc.)

Best Practices:

There should be no limits on extending the solution and loading external data. Period.

Ad-Hoc Analysis (Power Users)

Can you have a BI/dashboard solution without cubes? Absolutely. But if you don’t have cubes, you are going to

miss out on a major BI deliverable: empowering your financial analysts to perform ad hoc analyses. Once your

financial analysts have access to a robust cube and their trusty copy of Microsoft Excel, they will never go back to

writing T-SQL queries against the practice management system database — results are available in seconds,

instead of minutes or hours. The predominant power user tool is Microsoft Excel using PivotTables. Why is ad-

hoc capability so important for financial analysts and power users?

There will never be a set of dashboards that answer all user questions, especially the complex one. This

means that a tool is required for handling those questions.

Your financial analysts need to be able to self-serve and respond to queries quickly.

The financial analysts should not need to code in T-SQL or get a technical resource involved to respond to

queries

Having the cubes encourages your power users to “just fool around with the data” to see what they notice

Best Practices:

Your solution must have cubes for ad-hoc capabilities

Cube data storage is optimized for querying and reporting, and this enables fast queries and dashboards

Firm to determine ad-hoc access policies – typically limited to 1-5 power users in the finance department

Microsoft Excel is the preferred query tool, and Excel 2013 Professional 64-bit is strongly recommended


Multi-Currency Support

The current multi-currency (“M/C”) support within Iridium is as follows:

Firms are able to load in expenses or revenue in foreign currencies, but that data is converted to the

system/home currency of the profit module.

Since the Profit module is storing data at the period granularity, foreign currency data is converted based

on monthly exchange rates provided by the firm

We are having internal discussions regarding whether we should build the ability to slice profitability data

by foreign currency, and this is not yet a confirmed deliverable. The design question for Iridium is

whether adding the use case to “report on London profitability in GBP” provides enough value to justify

increasing the complexity of the cube. Watch this space!

The “PLACEHOLDER” Matter

The placeholder matter is used whenever we need to “divert” a portion of the expenses that working attorney may

have in a period from the actual matters that he/she worked on, and put them somewhere else. The “somewhere

else” in Iridium BI is the PLACEHOLDER matter.

There are two scenarios where the PLACEHOLDER matter is used:

Working Attorneys with Low Hours: If the working attorney has low hours in a period, a portion of their

expenses can be assigned to the PLACEHOLDER matter, and then the matters/clients with hours in that

period will not be “punished” with the high expenses for that Working Attorney. Obviously, this is tightly

related to the Adjusted Hours Strategy described above in the section “Working Attorneys with Low

Hours”.

Non-Working Attorney Revenue: We can move both the revenue and expenses from the Non-Working

Attorney to the PLACEHOLDER matter if that is your firm’s implementation decision.

In both cases when are adjusting hours the adjustment is stamped with the PLACEHOLDER matter.

Multiple Profitability Scenarios (Part 2)

We have covered the flexible options available within Iridium BI above, but this is an important topic so we want

to go a little deeper on this. The key points:

We are not forcing a single profitability methodology on our clients

We expect each client to have different allocation and reporting requirements

Our product is designed to enable our clients to use different scenarios for different situations

As an example, a firm might want to have three different methods for reporting on three different entities:

Working Attorneys: We want to review profitability on a monthly basis throughout the year. We think that

evaluating profitability using the last rolling 12 periods, and use the Period Worked – Optimistic method

since we don’t penalize Working Attorneys for write-downs and write-offs.

Partners: We want them to focus on their annual Fees Collected goal. We are going to always report

using YTD basis, and use the Period Worked – Pessimistic method to encourage them to collect fees

quickly


Clients/Matters: We want to take a longer term view, so we will review profitability in the current fiscal

year YTD combined with the full year results from the prior fiscal year. We will use the Period Worked –

Expected method, since that allows us to project profitability including the recent work.

Best Practices:

We encourage firms to use multiple scenarios for different entities

Firms may want to educate the report recipients on the differences between the scenarios, and why each

scenario was chosen for the different entities.

Participating Attorney Slicing

This is a really cool feature. Within Expert or Elite, you have the ability to track “participation credits” by attorney.

A typical example is Origination credits: Jason and Suzanne worked together to sign up a new client. Jason

received 40% credit, and Suzanne received 60%. This is fully supported in our Revenue module. For example if we

collected $1 million in fees from that client in 2014 then Jason would receive credit for $400K and Suzanne would

receive credit for $600K. We also allow firms to bring in the participation credits for multiple types that are

defined in their PMS, such as Client Origination, Matter Origination, Client Managing, etc.

So in the example above, let’s say that there was $500K in profit on the $1 million in collections. We can then say

that Jason’s profitability credit is $200K, and Suzanne’s is $300K.

A nice variation on this is that Suzanne had Origination credits on 10 clients last year, with the participation

percent ranging from 10% to 100%. We can apply those percentages to the profit on each client, and then say

that Suzanne’s client origination contribution last year resulted in $2.8 million in profit for the firm.

This feature is fully supported in both the Revenue and Profit modules, and available through the dashboards and

the ad-hoc (power user) scenario.

GL Transactions for Working Attorneys

Your firm may create journal entries for some overhead expenses which are stamped with the Working Attorney

ID. Even though these overhead expenses are flagged for allocation based on the firm-defined rules, the firm has

the option of leaving these expenses with the Working Attorney that is stamped on the GL journal entry.

Let’s look at an example: the firm has a group of GL accounts for training expenses, and they have been combined

into a Profit Account for “TRAINING”. The vast majority of the journal entries are for training expenses that are

applicable to the total firm, a single office, etc. But there are some journal entries for TRAINING that are specific

to a single Working Attorney – let’s say that an attorney was sent to a week of negotiation training in Miami for a

cost of $4000. This training expense can be applied to that working attorney in the profit processing, and all

other training expenses will be allocated to the offices, firm-wide, etc.

Here are the available options, using our TRAINING example above:

Ignore the WA on the journal entry, treat all TRAINING expenses as overhead

Create a new Profit Account for TRAINING-DIRECT, and assign all WA GL transactions as direct expense

Assign the WA GL transactions to TRAINING, rolling the expense up with the additional expenses that will

come from the allocations

Best Practices: All options are supported, and the firm should choose based on its preferences.


Handling Inter-Office Expense Transfers

Inter-office expense transfers are used to push expenses from one office to another within the GL. As an example

the headquarters office might house the entire IT department, which costs $2 million per year. The other offices

rely on the headquarters for IT support, so the firm pushes $250K in IT expense to the other offices using journal

entries. We support three scenarios for inter-office transfers in the Iridium BI profit module:

Doing it, but don’t want to stop: You are already doing inter-office transfers in the GL, and you want to

continue. In this case the profit module will just consider those expenses to be in the receiving offices,

and then will allocate them normally to working attorneys based on the firm-defined rules.

Doing it, but want to stop: You are doing inter-office transfers in the GL, but you want to stop. Many

firms want to stop the transfers in the GL, and want the profit module to take over this processing. We

strongly encourage moving the allocations to the profit module: there is less work for finance staff since it

will be part of the automatic monthly processing, and the allocations can be more accurate since the

profit module can allocate based on 3-2-1 points, billable dollars, etc.

Not doing it, and don’t want to do it in the GL: You are not doing inter-office transfers in the GL, but

you want to push the expenses to other offices. The profit module will automate this task, and again

offers numerous allocation methods to tailor the inter-office expense transfers based on your firms’

requirements.


Appendix 1: Iridium BI Profit Dashboards

A complete set of Profit dashboards is included with the Profit module. The Profit dashboards/reports have two

basic layouts:

List (Comparison) Views: provide a list of offices, departments, etc. The user can sort the list to review

ranking by various metrics, and also use the list to drill into a single record.

Overview (Single Entity) View: Look at one office, working attorney, etc. in detail

The Profit dashboards are also role-based, so users can see only appropriate content based on their role. Roles

include Executive, Office Manager, Department Head, Team Leader, Participating Attorney, Responsible Attorney,

and Working Attorney.

Our dashboards are fast – our target is 2-4 second screen refresh at most client sites (highly dependent on client

server specification!) We are able to accomplish this by (1) building the dashboards on our highly optimized

cubes, and (2) utilizing SQL Server Reporting Services (“SSRS”) as our report development tool, and (3) a bunch of

advanced techniques that we have implemented in our SSRS reports. The other big advantage of SSRS is that we

have unlimited flexibility to create our own proprietary graphical data representations.

Notes:

We extend our dashboard capabilities for all modules on literally a monthly basis. Iridium clients are

entitled to all future Profit module dashboards that are developed – free of charge, and including

installation.

Clients can create their own new dashboards and reports on top of the Iridium BI cubes without

restriction, and using any reporting tool that they choose.

Important Note: We typically do not deploy Iridium’s SSRS dashboards to SharePoint because we get

better performance when deployed native mode. What we have done with clients that have SharePoint

intranets is put a launch point in the intranet that links to the SSRS dashboards deployed natively.


The Overview Page (Part 1)

The Overview Page serves two purposes: (1) to give the user a quick overview of the performance of the firm or

selected entity, and (2) to serve as a launching page for the other Profit reports.

The Overview Page contains a complete overview of the selected entity, and the user can scroll up/down to see all

of the content. (Due to the length of the report we needed to break it into two pages for this document.) Page

components:

The Income Statement table shows the YTD breakdown for the components of the Income Statement,

including actual, rate, and margin.

The Trend graphs highlight Revenue, Expense, Profit, Profit Margin %, and Leverage values for each period

YTD.

The Reports section in the upper right-hand corner lists all available reports, allowing for the user to

quickly locate and launch reports.

Note: The Overview Page is also displayed when the user selects a single Office, Department, or Team. In this case

only the data for the selected entity is displayed.


The Overview Page (Part 2)

The Overview Page (Part 2) is a continuation of Page 1, and visible simply by scrolling down.

The four tables show the top 10 Clients, Matters, Working Attorneys, and Matter Attorneys. They are sortable by

the columns of the table and can be changed by clicking on a column header. In the example above, all four

tables are sorted by “Revenue”.

At the bottom of the page there are two scatter charts that plot the firm’s departments by Revenue to Profit

Margin %, and Leverage to Profit Rate. The scatter charts vary based on the entity selected, for example

comparing Working Attorney performance when displaying the overview for a Working Attorney.

Note: Clicking on one of the blue names brings you to the respective detail page. The detail pages have a similar

layout as the overview page, but is populated with the appropriate data.


List Format Pages

The Offices Page is a “list” format page that facilitates comparisons between offices. In the example, the San

Francisco office is not doing as well as the New York office. It isn’t making any profit, as denoted by the red

numeric value and the bar graph, and is actually losing money since its overhead expense is larger than its gross

profit. From the Office Page the user can click on an office to go to the office’s detail page.

Other Available “List” Pages include:

The Departments Page

The Teams Page

The Working Attorneys Page

The Matter Attorneys Page

The Participating Attorneys Page

The Clients Page

The Matters Page


The Working Attorney Overview Page

The Working Attorney

Overview Page has a very

similar layout to the Firm

Overview page.

The first section has the

same tables and charts that

show income statement

YTD, and the trends for

revenue, expense, profit,

etc.

The second section displays

two of the four comparison

tables that are appropriate

for working attorneys. The

bottom-left graph still plots

data based on profit margin

% and revenue for the

working attorneys in the

firm. The bottom-right

graph plots the working

attorneys data based on

profit rate and hours. The

big blue dot represents the

currently selected working

attorney.

Note that there are similar

small layout variances for

the other overview pages.

Documents

Profitability for Legal and Professional Services Firmsfiles.ctctcdn.com/3215820e001/046a5837-740e-4c0f-8... · confident that the latest version of our Profit module is taking law